Italy: populist undercurrents

Key views

The strong performance of populist parties in Italy is balanced against Germany forming a new government. We see scope for pressure on Italian and peripheral eurozone bonds.

A government involving populist parties might take a confrontational stance against the EU and loosen fiscal policy. We see an increased probability of another election this year.

At the EU summit this month, the UK will seek agreement on a transition deal that avoids a cliff-edge Brexit in March 2019.

Results of the Italian election point to a hung parliament, with no party or coalition winning enough votes to form a government. The strong showing of populist parties complicates the Italian political outlook but is balanced against a new government forming in Germany. We see scope for pressure on Italian and peripheral eurozone government bonds but don’t see this as a sustained negative for the euro or regional equities.

The nationalist Lega party is emerging stronger than Silvio Berlusconi’s Forza Italia within the centre-right coalition. The Five Star Movement’s performance beat poll forecasts, making the anti-establishment party a likely linchpin in any potential government. Yet neither party campaigned on an anti-euro message, focusing more on domestic issues. The defeat of Marine Le Pen’s National Front in France last year spurred even the most eurosceptic parties to tone down their euro exit talk. Anti-European sentiment was largely absent through the election campaign.

We believe it unlikely that Five Star will partner with Lega to form a government. Lega’s ambition is to lead the centre-right coalition rather than be a junior partner in an unstable alliance with Five Star. At some point, an increasingly mainstream Five Star and the centre-left Democratic Party may warm up to each other. A new Italian parliament needs to be convened by March 23, yet negotiations are likely to drag on beyond then. Political noise is poised to remain high until a sustainable coalition emerges.

At the same time, a healthier Italian economy looks likely to cushion some of the short-term hit. Real GDP growth of 1.5% in Italy looks realistic for 2018-2019, though ongoing political uncertainty may be a drag. The debt-to-GDP ratio should start falling from this year. Italy’s banking sector appears to have turned the corner and is making progress in dealing with the large non-performing loans on its books.

We now see an increased probability of new elections after the summer. Any government involving Lega or Five Star is likely to take a confrontational stance against the European Union, especially on immigration. We believe a government involving those parties would partially roll back fiscal prudence and economic reforms.

Yet Germany’s new government bodes well for renewed momentum behind deeper European integration, we believe. On Sunday the Social Democratic Party (SPD) membership voted in favour of a coalition. The pro-Europe SPD will take over key ministries such as finance and foreign affairs. The outcome should boost corporate sentiment and could give the European Central Bank more confidence in its growth and inflation forecasts.

Meanwhile, a key date on the UK’s Brexit calendar looms: the European Council meeting in Brussels on March 22-23. Expectations are high, especially in the UK, that a transition deal can be reached that would avoid a cliff-edge Brexit in March 2019. Compromise is far from certain, and we see volatility in Brexit-sensitive assets – particularly sterling – rising ahead of the March meeting. Clarity on a transition deal is a key factor for companies deciding on contingency plans. The issues around the Irish border appear likely to be kicked down the road beyond any agreement on a transition deal.

This material is prepared by BlackRock and is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of March 2018 and may change as subsequent conditions vary.

The information and opinions contained in this material are derived from proprietary and non-proprietary sources deemed by BlackRock to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. As such, no warranty of accuracy or reliability is given and no responsibility arising in any other way for errors and omissions (including responsibility to any person by reason of negligence) is accepted by BlackRock, its officers, employees or agents. This material may contain ‘forward-looking’ information that is not purely historical in nature. Such information may include, among other things, projections and forecasts. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this material is at the sole discretion of the reader. This material is intended for informational purposes only and does not constitute investment advice or an offer or solicitation to purchase or sell in any securities, BlackRock funds or any investment strategy nor shall any securities be offered or sold to any person in any jurisdiction in which an offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. In the U.S., this material is intended for public distribution. In the EU issued by BlackRock Investment Management (UK) Limited (authorised and regulated by the Financial Conduct Authority). Registered office: 12 Throgmorton Avenue, London, EC2N 2DL. Registered in England No. 2020394. Tel: 020 7743 3000. For your protection, telephone calls are usually recorded. BlackRock is a trading name of BlackRock Investment Management (UK) Limited. This material is for distribution to Professional Clients (as defined by the FCA Rules) and Qualified Investors and should not be relied upon by any other persons. For qualified investors in Switzerland, this material shall be exclusively made available to, and directed at, qualified investors as defined in the Swiss Collective Investment Schemes Act of 23 June 2006, as amended. In the Netherlands Issued in the Netherlands by the Amsterdam branch office of BlackRock Investment Management (UK) Limited: Amstelplein 1, 1096 HA Amsterdam, Tel: 020 – 549 5200. In South Africa, please be advised that BlackRock Investment Management (UK) Limited is an authorised Financial Services provider with the South African Financial Services Board, FSP No. 43288. In Dubai: This information can be distributed in and from the Dubai International Financial Centre (DIFC) by BlackRock Advisors (UK) Limited — Dubai Branch which is regulated by the Dubai Financial Services Authority (‘DFSA’) and is only directed at ‘Professional Clients’ and no other person should rely upon the information contained within it. Neither the DFSA or any other authority or regulator located in the GCC or MENA region has approved this information. This information and associated materials have been provided to you at your express request, and for your exclusive use. This document is not intended for distribution to, or use by, any person or entity in any jurisdiction or country where such distribution would be unlawful under the securities laws of such. Any distribution, by whatever means, of this document and related material to persons other than those referred to above is strictly prohibited. In Singapore, this is issued by BlackRock (Singapore) Limited (Co. registration no. 200010143N). In Hong Kong, this material is issued by BlackRock Asset Management North Asia Limited and has not been reviewed by the Securities and Futures Commission of Hong Kong. In Korea, this material is for Professional Investors only. In Japan, this is issued by BlackRock Japan. Co., Ltd. (Financial Instruments Business Operator: The Kanto Regional Financial Bureau. License No375, Association Memberships: Japan Investment Advisers Association, the Investment Trusts Association, Japan, Japan Securities Dealers Association, Type II Financial Instruments Firms Association.) for Professional Investors only (Professional Investor is defined in Financial Instruments and Exchange Act). In Taiwan, independently operated by BlackRock Investment Management (Taiwan) Limited. Address: 28/F, No. 95, Tun Hwa South Road, Section 2, Taipei 106, Taiwan. Tel: (02)23261600. In Australia, issued by BlackRock Investment Management (Australia) Limited ABN 13 006 165 975, AFSL 230 523 (BIMAL). This material is not a securities recommendation or an offer or solicitation with respect to the purchase or sale of any securities in any jurisdiction. The material provides general information only and does not take into account your individual objectives, financial situation, needs or circumstances. Before making any investment decision, you should therefore assess whether the material is appropriate for you and obtain financial advice tailored to you having regard to your individual objectives, financial situation, needs and circumstances. BIMAL, its officers, employees and agents believe that the information in this material and the sources on which it is based (which may be sourced from third parties) are correct as at the date of publication. While every care has been taken in the preparation of this material, no warranty of accuracy or reliability is given and no responsibility for the information is accepted by BIMAL, its officers, employees or agents. Any investment is subject to investment risk, including delays on the payment of withdrawal proceeds and the loss of income or the principal invested. While any forecasts, estimates and opinions in this material are made on a reasonable basis, actual future results and operations may differ materially from the forecasts, estimates and opinions set out in this material. No guarantee as to the repayment of capital or the performance of any product or rate of return referred to in this material is made by BIMAL or any entity in the BlackRock group of companies. For other APAC Countries, this material is issued for Institutional Investors only (or professional/sophisticated/qualified investors, as such term may apply in local jurisdictions) and does not constitute investment advice or an offer or solicitation to purchase or sell in any securities, BlackRock funds or any investment strategy nor shall any securities be offered or sold to any person in any jurisdiction in which an offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. In Canada, this material is intended for permitted clients only. In Latin America and Iberia, this material is for educational purposes only and does not constitute investment advice nor an offer or solicitation to sell or a solicitation of an offer to buy any shares of any fund (nor shall any such shares be offered or sold to any person) in any jurisdiction in which an offer, solicitation, purchase or sale would be unlawful under the securities law of that jurisdiction. If any funds are mentioned or inferred to in this material, it is possible that some or all of the funds have not been registered with the securities regulator of Brazil, Chile, Colombia, Mexico, Panama, Peru, Portugal, Spain, Uruguay or any other securities regulator in any Latin American country and thus might not be publicly offered within any such country. The securities regulators of such countries have not confirmed the accuracy of any information contained herein.

The information provided here is neither tax nor legal advice. Investors should speak to their tax professional for specific information regarding their tax situation. Investment involves risk including possible loss of principal.

International investing involves risks, including risks related to foreign currency, limited liquidity, less government regulation and the possibility of substantial volatility due to adverse political, economic or other developments. These risks often are heightened for investments in emerging/ developing markets or in concentrations of single countries.